What happened yesterday?
The Cabinet decided that when exiting the troika bailout programme on December 15th, Ireland would go it alone rather than apply for a precautionary credit line from Europe or from the International Monetary Fund.
How will we pay for the deficit between public income and public
expenditure?
We will rely on borrowed money that is on deposit, and/or fresh borrowing. The National Treasury Management Agency has about €21.5 billion on deposit, which it estimates is enough to fund the shortfall in the public finances up to the first quarter of 2015, as well as pay off any borrowings that fall due to be paid during that period.
Why did the Government decide to go it alone?
Last September, Minister for Finance Michael Noonan was saying Ireland would need some type of "hand-holding" measure when exiting the bailout in order to give extra reassurance to the markets. But more recently he began suggesting we would exit the programme without seeking such an overdraft facility because conditions were more favourable.
A positive consequence of not seeking a precautionary credit line is that we do not have to face the conditions that would be associated with such an arrangement, the
negotiations over conditions that would accompany any application, and debates over such conditions in the parliaments of other European states.
So what's the downside?
Next year could be a turbulent one, with the ECB about to stress-test the main euro zone banks. President of the ECB Mario Draghi has said some banks need to fail the tests for the process to have credibility, raising the prospect of more public money being needed to bail out banks.
In such a scenario, the markets may be a lot more spooked about loans to euro zone sovereigns than they are at present. In such a context, a precautionary credit line might give reassurance to the markets that lenders to Ireland would get their money back.
On the other hand, if the crisis got too big, the type of credit line being discussed – about €10 billion – might be too small to make an impression.
Another downside is that the cash buffer we are maintaining – it will allow us weather any temporary storm that might arise in the bond markets – is costly. The money is borrowed at one rate and put on deposit at a lower one. Given the amounts involved, the cost runs to hundreds of millions of euro per annum.
Can we change our mind?
The European Stability
Mechanism was established last year and has a maximum lending capacity of €500 billion.
It is designed to provide a permanent firewall for the euro zone and can be used to provide financial assistance to members states that are in difficulty.
Just because we didn’t apply for a precautionary credit line as we exit the bailout doesn’t mean we can’t seek supportive funding if we get into trouble further down the line.
